September 29, 2007

Food prices and poverty

Here is a question for the economics student: Are higher world food prices good or bad for the world's poor?

If you have been paying attention to the advocates of the Doha "Development" Round, who have trumpeted the benefits that the poor would get from agricultural liberalization in the advanced countries, you would be answering that it's got to be good. After all, poor people make a living off agriculture, and if the prices of what they produce increase, their real incomes must go up as well.

But now turn to the concerns being expressed (here and here) about the consequences of the rise in food prices due to the growing demand for biofuels (especially ethanol made from corn), and you get the exact opposite implication: higher food prices, it is now said, raise the cost of living for the poor and reduce the real amount of food aid the gets delivered.

The real answer of course is that it depends on whether a poor household is a net seller or buyer of food (that is, whether it grows more or less food than it consumes). This means that the rural poor generally tends to benefit from higher food prices, whereas the urban poor generally get hurt. How large the impact is depends, in turn, on the size of the food account as a share of total expenditures or income of a household. And whether the change is good or bad for a nation's poor as a whole depends on the geography of poverty in a country.

So as an economist loves to say, it depends. But it depends in predictable ways on household and country characteristics.

But you would not know it from the way these issues get discussed in the public debate.

Comments

What you point out is a perfect example of how commentators chose their facts selectively to bolster their own ideological outlook.

Those who dislike big business highlight the effects on the poor. Those who like "efficiency" highlight the benefits of free trade.

It's not "it depends", it's who are the winners and who are the losers in any transaction? One of the fundamental fictions of economics is that both sides can be net gainers from trade. The fact that Ricardo is still being cited as an example shows how rarely this works in practice.

The deficiency in the model is especially glaring now that more people are aware of the negative effects on the environment and labor from certain types of deals. Ricardian's like to focus on the benefits to the capitalists in an exchange. This was an understandable model when he did his work. At the time history was viewed as the stories of Kings and generals. Now history acknowledges there may be other stories as well.

This is an excellent exposition of a complex subject: One must look at whether households are net producers or net consumers of food.

However, I posit that if we overlook politics, then rising international food prices might not have any significant effect on the no. of poor people in a country.

The recent rise in internatinal wheat prices have compounded the problems of the Pakistani poor.

For instance, rising internatinal prices have led to a massive inflation in core food commodities like wheat in Pakistan even when Pakistan is a net exporter of wheat.

As a consequence, the urban poor are defintely worse-off than before.

However, this has not changed the economic situation of the rural poor -- the subsistance farmers. They are still getting the same price for their wheat bushels as in the previous years.

The real beneficiaries have been the middlemen: owners of flour mills in Pakistan, who, incidently, are disproportionately represented in the Parliament.

The provincial governements (monopsony conditions) have been purchasing wheat at the same price they were years ago, but the market price has risen sharply. Instead of improving the quality of life of the poor, increasing international prices have provided an incentive to mill owners to export more wheat than previously.

I don't think that decreasing subsidies to the farmers in the developed countries will neccessarily reduce poverty in developing nations, unless we find solutions for the politically-motivated market distortions in the developing countries.

For an excellent take on the links between politics and poor agricultural output please see: Bates, Robert (1981) "Markets and States in Tropical Africa"

First. There are plenty of more poor people in need of cheaper food than there are food producers ready to ripe benefits out of higher prices so that no way will higher food prices favor the poor… and this does not depend on anything.

Second. Who has said that trade should lead to higher prices, if it works it should lead to lower prices. The particular problem in this case is that if production is displaced to areas where they do not count with the generous agricultural subsidies, as those in Europe, then these generous subsidies will not be generously distributed around d the world in terms of lower prices and so therefore you suddenly end up with higher food prices. No problem though, this could be fixed…depending on if we can convince the European common market to pay out their agricultural subsidies to Africa!

Third. In this particular case of ethanol not even the particular farmer who earns more for a while does good… as neither does he who goes out to chop down the last tree in his forest to make a buck. This ethanol business as is is environmentally unsustainable and guess who are going to pay the most for that? Right, the poor.

Though I am economist there are days that I know I am much better off forgetting it.

other detail:
not all farmers produce crops that could have higher prices.
(cocoa, coca, tea or coffee won't be used for ethanol or to feed cows as far as i know)
everybody consumes crops that could have higher price (wheat, rice, maize..)

What a great post, very clear and picks up on the earlier Driscoll post regarding the lack of nuance in arguments about trade.

I guess another question would be whether the rise in food price leads to more intensive agricultural production, a shift away from industrial production and consequently lower long term productivity growth. Short term benefit but longer term costs.

The numbers cited by Cline in the Foreign Affairs article are based on a dated CGE model and run on a simulation of "full liberalization" meaning that all global tariffs and subsidies are to be reduced to zero. If you follow the current round you know that isn't what's being negotiated.

The World Bank has used an updated CGE model and predicts that the benefits for developing countries under a "likely" scenario that resembles what is under discussion in Geneva right now will yield only $16 billion for the developing countries, less than a penny per day per capita or a one time increase in the level of income by 0.2 percent.

These "gains" only go to a small handful of developing countries--mostly large agricultural exporting countries such as Brazil and Argentina (soy). Even IF the price increases and subsequent increases were high for these countries they generate very little employment and have very limited linkages to the rest of the country.

And of course, the beneficiaries have to compensate the losers to make the trade pareto optimal. Somehow I don't see Cargill and ADM--key winners in Brazilian soy trade under a liberalization scenario--paying off Brazilian industrialists or a trade adjustment assistance fund to help industrial workers who lost their jobs move out to the country and pick soy!

Finally, models like these assume that an economy is "revenue neutral" and therefore any lost revenue from a tariff reduction is magically replaced with a domestic tax. According to the same models, Brazil's "gain" is at $3.6 billion but it stands to lose $3.1 billion in tariff revenue.

In my opinion, an important question in this context, is whether food prices really are high or not. To answer this question I looked at the The Economic Report of the President, which has indexes for prices received by farmers (Table B-101) and for consumer prices (Table B-60). The farm price indexes are set to 100 for the 1990-1992 period. Adjusting the indexes for the CPI-U shows that crop prices have fallen from 222.02 in 1975 to 86.77 in December of 2006. The low point was 70.18 in October of 2005. The fall for livestock and products is not as large. From 156.42 in 1975 to 76.01 in December of 2006.

Looking back further the crop price index peaked at 313 in 1947 and the livestock index peaked at 232 in 1948. From the 1947 peak, the crop price index fell by more than 3/4ths by 2000. A graph of farm prices can be found at "Real Farm Prices 1940 - 2006" (http://tinyurl.com/39agn4).

As of September of 2007 (see http://usda.mannlib.cornell.edu/usda/current/AgriPric/AgriPric-09-27-2007.pdf) farm prices were somewhat higher. The CPI-U adjusted crop price index is roughly 94 and the livestock price index is around 92. My guess is that prices indexes will tend to fall over the next few years as the global wheat crop comes back. However, I don't have a wheat weighting in the crop indexes handy.

notsneaky : right now, EU subsidies may be good for very poor countries. these countries have almost free access on EU agricultural markets under the "everything but arms" system, and benefit from cheap, subsidised, food imports. If you suppress Eu subsidies, middle income countries (cairns group) will have access to EU markets, replacing poor countries; and imported food price will rise in poor countries. See Panagyria who makes a similar argument (rodrik and panagyria agree on trade, big surprise) :

Well, Indonesian poor farmers (who made up two third of Indonesia farm households) are net consumer. So, they should be benefited by lower food prices. But rice is import is near taboo in Indonesia, because of intense lobby from interest groups (richer farmers association who are minority).

The majority can not win, because the transaction costs to organize themselves are too high.

as an recently ex-IR student may I give a brief answer in the form of a question:

The fact that the rural poor are going to be better off as a result of an increase in food price is consistent in a framework of perfect competition if those rural poor can sell directly in international markets or if they can choose between competitive intermediaries.

But many small producers of food products are selling to just one intermediary within a small margin of fluctuation. The higher price would then be absorbed by the intermediary in terms of higher margins.

Consequently, the farmer that just produces one kind of product will see the price of others produces heighten without having the compensation. Therefore he would also be worst off.

Countries are shifting to biofuels in response to climate change and rising oil prices. But biofuel production poses new food security risks and challenges for poor people. Higher food prices, subsidies for biofuels, and environmental degradation will all be felt disproportionately by the developing world. So while developing and using biofuels is high on the global political agenda, policymakers, researchers and others must carefully assess the consequences for the poorest of the poor.

Countries are shifting to biofuels in response to climate change and rising oil prices. But biofuel production poses new food security risks and challenges for poor people. Higher food prices, subsidies for biofuels, and environmental degradation will all be felt disproportionately by the developing world. So while developing and using biofuels is high on the global political agenda, policymakers, researchers and others must carefully assess the consequences for the poorest of the poor.

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In general the developed states want natural resources from the less developed states at favorable prices. The developing states want trade policies that encourage local business and nobody cares what the undeveloped states want since they have no clout.

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